Policyholders focus on lower limits and increasing excesses

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A deep recession could result in a further reduction in demand for insurance products, AM Best Co has warned.

The ratings agency’s report on UK non-life insurer market conditions said that policyholders were more likely to consider buying lower limits and increasing excesses for discretionary products such as contents insurance, with insurers dependent on trade volumes being negatively impacted.

AM Best’s director of analytics Catherine Thomas said: “Low investment returns and shrinking reserve releases are resulting in insurers having to focus increasingly on adequate pricing of risks.

“Modest rate increases have been achieved for most lines of business in 2011 and 2012, with the greatest rate increases occurring in the motor lines.

“However, appropriate pricing of risks is challenging as economic difficulties are suppressing demand for insurance products, while excess capacity is chasing what business is available.”

The Rates Rise, but Economic Conditions Place Pressure on Performance report concluded that market conditions remained challenging because of the difficult economic environment curbing demand for coverage.

It added that insurers could no longer rely on reserve releases to improve profitability, and were under pressure to price appropriately in the face of low investment returns.

The report looked closely at the UK motor, property and liability sectors and the impact of the severe flooding that occurred in June, July and September.

AM Best report author and Europe and emerging markets director of industry research Yvette Essen said: “The UK property market has faced a difficult 2012. Prior to the 2012 floods, rates had experienced some upward pressure, although increases were modest.

“Rates are expected to gain further momentum post the floods, but to what extent remains to be seen. The level of weather-related losses is a key driver of performance in the property sector, and flood risk in particular is a major concern.”